A state-level analysis of Okun's law

Okun's law is an empirical relationship that measures the correlation between the deviation of the unemployment rate from its natural rate and the deviation of output growth from its potential. This relationship is often referred to by policy makers and used by forecasters. In this paper, we estimate Okun's coefficients separately for each U.S. state using an unobserved components framework and find variation of the coefficients across states. We exploit this heterogeneity of Okun's coefficients to directly examine the potential factors that shape Okun's law, and find that indicators of more flexible labor markets (higher levels of education achievement in the population, lower rate of unionization, and a higher share of non-manufacturing employment) are important determinants of the differences in Okun's coefficient across states.

Title	A state-level analysis of Okun's law
Creator	Guisinger, Amy Y.
	Owyang, M. T.
	Sinclair, T. M.
	Hernandez-Murillo, R.
Publisher	Regional Science and Urban Economics
Academic Department	Economics
Division	Social Sciences
Organization	Lafayette College
Date Issued	January 2018
Date Available	2020-01-01
Type	Article
Language	English
Keyword	Correlated unobserved components
	Potential output
	Natural rate of unemployment
Bibliographic Citation	Guisinger, A. Y., et al. (2018 Jan) "A state-level analysis of Okun's law." Regional Science and Urban Economics 68: 239-48.
Standard Identifier	Handle 10385/9p290987v
Standard Identifier	DOI 10.1016/j.regsciurbeco.2017.11.005
Permalink	http://hdl.handle.net/10385/9p290987v
Rights Statement	In Copyright
Rights Holders	Elsevier B.V.